Everybody hates the 'taxman' and for good reason. As a wise man once said, "the only things certain are death and taxes." It certainly holds true now. The purpose of this article is to help readers understand tax laws, exemptions and how to avoid trouble with the Internal Revenue Service (IRS). The prudent taxpayer pays the least amount of taxes allowable under the law.
First, let's investigate new rule changes in the tax code for 2006 to avoid the April 15 rush later.
The IRS recently came out with a flurry of new tax laws but for the purpose of this article, we will only cover the most common areas for the average taxpayer. Last year's Gulf Opportunity Zone Act is now law. It states that all hurricane victims can deduct 100 percent of their casualty losses. The law also covers any rebuilding costs the taxpayer may have incurred.
Casualty Loss Deduction
The law regarding casualty (property) losses is another vital change the taxpayer should be familiar with. If you were involved in any accident or natural disaster (i.e., earthquakes, floods, terror bombings), you may be eligible to use the deductions.
This law also applies to victims of crime. As with every item that you can deduct there are some that you can't—such as, if your pet broke a valuable art object, you smashed a prized vase you received as a gift, and progressive deterioration. Exceptions to this rule are damages incurred due to natural disaster or sudden infestation.
The new tax laws also address mislaid or lost property—both of which were normally not tax-deductible unless your property was either lost or mislaid as a result of a sudden and unexpected or unusual event. Case in point: your garage door accidentally closes on the hood of your car. The expensive hood ornament (a silver globe) is broken off. The loss of the silver hood ornament is a casualty loss, hence tax-deductible.
The IRS has rules to help you calculate casualty loss deductions. Your casualty loss is tax-deductible if it is more than $100 per loss and if it exceeds 10 percent of your AGI (Adjusted Gross Income).
For example, Suzie purchased a handgun collection for $2,300. In the parking lot her SUV was broken into and all of the guns were stolen. Four months later, her house caught on fire. Nobody was hurt but damage to her home was considerable. Assume she had an AGI of $50,000 and uninsured damages to her house amounted to $13,000. This is how she should calculate her damages using the Casualty Loss Deduction:
• Event 1: Stolen gun collection ($2,300-$100) = $2,200
• Event 2: Damaged house ($13,000-$100) = $12,900
• Total Losses ($2,200 + $12,900) = $15,100
• 10% Threshold ($50,000 AGI x 10%) = $5,000
• Deductible Losses ($15,100 - $5,000) = $10,100
Charitable Contributions
There is good news for people who give regularly to charitable organizations, but your gift of cash or property has to meet IRS requirements in order to be tax-deductible.
• The donation must be cash or property.
• Make sure your charity of choice is a legitimate 501 (c) (3) organization with IRS tax-exempt status. This includes most churches and other religious organizations.
• You must be able to itemize all donations. If you can't document, don't deduct. The IRS won't take your word. Prove it on paper.
• Have all canceled checks, letters of acknowledgement from the charity and fair market value appraisals handy for all donated property.
• All cash donations of more than $500 must be accompanied by an IRS Form 8283.
• If you donate your car, boat, truck, boat, airplane or any other vehicle worth more than $500 you must have written acknowledgement from the organization before you can claim the tax deduction.
• Written appraisal must accompany any donated property worth more than $5,000.
IRA imposes some limits on how much a taxpayer may deduct in a tax year. You may deduct cash donations of only up to 50 percent of your AGI, and property donations cannot exceed 30 percent of AGI. Donations of appreciated capital gains assets cannot exceed 20 percent of AGI. All excess donations can be carried over for five years.
For this year only, taxpayers may deduct up to 100 percent of your AGI. Such donations are restricted to cash and must be paid between August 28 and December 31. Some donations are always non-deductible, such as donations to individuals, foreign governments and businesses.
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